Flipkart-Walmart deal: Why Flipkart acquisition is right

Flipkart is about to buy American company Walmart. The deal is finalized. Walmart is the world’s largest company by revenue. Many news related to this deal is going on continuously. There is also a news that this will be India’s largest foreign direct investment so far. But this is not true. The reason for this is quite clear. Flipkart’s two major investors are SoftBank and Tiger Global.

SoftBank is from Japan and Tiger Global is connected to the US. In this deal, Walmart is only buying part of the existing investors of Flipkart, no new investment is taking place.

Yes, it is definitely that the new investment that Walmart will make in Flipkart in the coming years, we can truly call it FDI. The other news is that an outside American company is buying an Indian company like Flipkart, and this is not true. Many people believe that the Indianness of Flipkart should remain, but as I said earlier, the big investors of Flipkart are foreigners. If we notice, Raghav Bahl wrote in his column: “The stake being sold is that of a Singapore company, not an Indian company.”

What’s Up With The FlipKart?

The third news is going on with Sachin Bansal. Sachin Bansal started Flipkart with Binny Bansal (both of whom are not brothers). Sachin is about to earn nearly a billion dollars by selling 5.5% of his stake in Flipkart to Walmart. Many people have made a long and wide eulogy on this big earning. But I believe that Sachin Bansal has been very lucky and has got the opportunity to sell his 5.5% stake to Walmart at the right time. To understand this in depth, we have to understand a phrase in the dictionary of economics — network externality.

what is the meaning of this? The more people join any network, the more the value of that network increases. Now take an app like Swiggy. The more people use this app, the more restaurants will want to be informed on this app. (The opposite will also be true).

The reason for this is that without worrying about the benefits, most e-commerce companies first try to bring more and more people to their network. And for this, these companies use mediums like discounts and offers. It is borne by the company (ie the investors of the company).

As Flipkart CEO Kalyan Krishnamurthy said some time ago: “Making profit is not our top priority these days.”

E-commerce companies run in losses due to discounts and offers. And to keep such companies running, it is important that investors keep bringing in new money and keep investing.

The intention behind this is that people should be assured that this is a website or app, on which one should buy or sell goods. If this kind of trust is created then the company gets a monopoly on the market and the company can earn a lot of profit. This is the expectation, at least theoretically.

But this does not always happen. Take Flipkart only. The company’s income increased by 29% to Rs 19,854 crore in 2016-2017. At the same time, the loss of the company increased by 68% to Rs 8,771 crore. Now what kind of business is this, where the loss increases faster than income?

As I said earlier, all the work done by Sarah is of network externalities. Flipkart was in a tizzy that its monopoly in the market would freeze and then the company would earn money. Before Flipkart, Snapdeal had the same intention. Now that company is on the verge of closure.

Amazon stands in front of Flipkart. Amazon has no shortage of money and is giving a tough competition to Flipkart on the network externalities front. In this environment, it was important for Flipkart to keep investing its investors and make up for the company’s losses. But no investor can invest money for unlimited time. So it became necessary here that Flipkart should buy a big company that can compete with Amazon. Therefore, nothing could be better for Flipkart than Walmart.

If Walmart did not buy Flipkart, then in the next two-three years the company could be on the verge of being shut down like Snapdeal. Therefore, I believe that Sachin Bansal was lucky and he got a chance to leave the company in time.

If Walmart does not buy Flipkart, then in the next two-three years, 5.5% of Sachin’s share will not have any special value. With the arrival of Walmart, the people who are currently working in Flipkart, their jobs will remain intact for a few more years. Apart from this, Walmart will try to take Flipkart in new directions. This will create more jobs. The company will run a few more years. India will benefit from this.

The fourth news is that Walmart will now sell Chinese goods on Flipkart. There is a lot of ruckus on this matter. But the question is, is Flipkart not selling Chinese goods yet? Where do the electronic devices that are sold on Flipkart’s website and app come from?

People of this type are also making fun, who sell their goods on Flipkart right now and know that they will not be able to compete with Chinese goods. Or at least there is fear within them. These are incompetent people, who do not want any kind of combat, which will benefit the customer. The problem is that such incompetent people can strangulate and make a point, but there is no one to listen to the customers.